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Risk of Businesses

[As of June 21, 2021]

Of the matters related to the status of the business and accounting as described in the Annual Securities Report, the following may have a significant impact on the decisions of investors.
Any forward looking statements contained in this section are made based on the judgment of the CRESCO Group as of March 31, 2021.

1. Risks related to changes in the business environment

The Group endeavors to respond flexibly to changes in the business environment by researching the market trend and expanding areas of business and customer groups. However, there is an growing tendency that demand for IT investment is significantly affected by IT strategies promoted and encouraged by the Japanese government as well as structural and other changes including the aging and decreasing population, in addition to domestic and international situations, economic conditions, business sentiment, etc.
Consequently, a slowdown in the economy and its deterioration can inhibit IT investment by customers to cause a decline in orders received, which can in turn adversely affect the operating results of the Group.

2. Quality risks in development projects

The Group practices project management based on a standardized method, trying to ensure management of all development processes including estimation, initiation, planning, execution, etc. and prevent the occurrence of delivery delays, additional costs, liability for damages, etc.
It is possible, however, that an unexpected discrepancy in the understanding of specifications or the occurrence of quality troubles at the development stage of a project causes the incurrence of additional costs, making the project less profitable or unprofitable.
In addition, although the Group monitors the progress of a project as it proceeds and endeavors to observe the contractual delivery date strictly, it is difficult for the Group to preclude uncertainty including external factors completely.
If the Group has failed to complete or deliver the work by the date agreed with the customer, it would be subject to delay penalties, and if the Group ultimately fails to complete or deliver the work, it would incur a liability for damages. In such cases, the operating results of the Group can be adversely affected.

3. Quality risks in software or services delivered

The Group guarantees the quality of software and/or services delivered (hereinafter referred to as “Deliverables”).
Quality troubles, however, can occur with Deliverables of the Group, and the incurrence of additional costs, liability for damages, etc. due to troubleshooting can adversely affect the operating results of the Group.
Although the Group rigorously controls the quality of Deliverables, in addition to the possibility of incurring liability for damages due to the occurrence of bugs and other problems, it is possible to incur an unexpected claim for damages if Deliverables are to be embedded in products of the recipient.
While the Group takes care not to infringe rights of other companies in acquiring and protecting intellectual property, it is possible that the Group is claimed for damages or consideration or equivalent for the use of intellectual property if it infringes any intellectual property right of another company without awareness, which can in turn adversely affect the operating results of the Group.

4. Risks in generating a new business

In the business environment surrounding the Group, a rapid progress takes place not only in economy but also technological innovation. Accordingly, industry standards, user and social needs are also changing rapidly.
The Group is endeavoring to generate innovative new businesses (services and products) in order to respond such changes in an agile way and ensure its competitive advantage.
It is difficult, however, to analyze the trend of the market and predict future demand appropriately given drastic changes in the trend in technology. If R&D and development management by the Group fail to work effectively, the Group cannot provide a new business in a timely manner. In that event, the emergence of a competitor which provides a revolutionary service or product, delay in the Group’s response to new technologies, opportunity loss, etc. can adversely affect the operating results of the Group.

5. Risks related to information security

In the course of its business, the Group handles various confidential information (business information, customer information, personal information, etc.) and is required to address information security cautiously and ensure strict information management.
The Group has developed various policies together with related internal regulations as well as strove for preventing an information security accident and reinforcing responsiveness to the detection of an incident and the occurrence of an accident by introducing the latest information security system and reinforcing the Group’s information security management system.
Furthermore, employees and contractors, upon signing agreements, are regularly provided with appropriate training and subjected to a compliance check, which covering information security as well, in order to raise their awareness about information management and prevent any information leakage from within.
In addition, support for the Act on the Protection of Personal Information has been strengthened by making an effort to obtain Privacy Mark certification and ISMS, and, at the same time, an effort towards safety control has been made by clarifying the hierarchy of responsibilities, in accordance with the Personal Information Protection Management System (PMS).
If, however, a leakage of personal information or confidential information should occur due to a cyberattack or information security accident, criminal act, etc. despite these measures, the operating results of the Group can be adversely affected due to the incurrence of liability for damages, a loss of social credibility, etc.

6. Risks related to the reliance on certain customers

Although the Group formulated business plans based on transactions with a wide range of customers, due to the nature of its business that is based on ongoing commercial relationship with its customers, the Group’s sales tend to concentrate on a limited number of customers.
The relationships with these customers have been stable since the commencement of transactions. A change in their business and/or outsourcing policies, however, can adversely affect the operating results of the Group.
In particular, sales to IBM Japan, Ltd. account for a significant percentage of the Group’s consolidated net sales as shown in the table below:

Counterparty Fiscal
year
ended
March 31,
2020
Fiscal
year
ended
March 31,
2021
Net sales
(Thousands of yen)
Percentage Net sales
(Thousands of yen)
Percentage
IBM Japan, Ltd. 5,168,020 13.1
%
5,032,470 12.7
%
Total consolidated net sales 39,337,600 100.0
%
39,706,144 100.0
%

Above figures do not include consumption taxes.

7. Risks related to securing and developing human resources and employee resignations

Amid the persistent labor shortage, it is inevitable that employee turnover will increase.
Based on the assumption that “difficulty in recruitment will continue and employee turnover will increase going forward,” the Group endeavors to make it more attractive and improve its work environment further for steadily securing and retaining human resources.
If, despite such efforts and measures, the Group fails to secure or develop such human resources as planned and if employee resignations increase, the operating results of the Group can be adversely affected.

8. Risks related to alliances with business partners

In the course of business operations, the Group has established alliances with contractors, including overseas contractors.
While the Group has implemented measures such as providing project information and holding business partner forums in order to strengthen the alliances with business partners, the Group’s inability to secure business partners in a timely and appropriate manner, or any changes with regard to such relationships can adversely affect operating results of the Group due to reasons including the hindrance of the launch and/or execution of a project and/or the provision of services.

9. Risks related to work and health

In light of the Japanese government’s policy on “work style reform” and the trend of relevant legal institutional changes, the Group has positively worked on personnel management and work environment development not only through appropriate institutional design but also through working hour management, encouragement to take a paid leave, anti-harassment measures, and promotion of mental and physical health of employees.
However, the persistent labor shortage, combined with the structure of system development, system failure at a customer’s location, responses to a delay in project development, etc., in addition to services or products offered by the Group, may cause stress-related health problems and/or a decline in productivity due to the loss of project members, which can in turn adversely affect the operating results of the Group.

10. Risks related to compliance

Led by the Internal Control Committee of the Company, the Group is working to improve corporate ethics by establishing the “Basic Policy on the Establishment of the Internal Control System” and the “Code of Conduct for Compliance Management” as the shared norm and endeavors to develop a fair and just corporate culture by ensuring the strict compliance with laws, regulations, and internal regulations, etc. by each and every officer and employee of the Group.
It is possible, however, that a violation of a relevant law or regulation or a wrongful act by an officer or employee cannot be completely avoided even if such measures are taken.
Should such an event occurs, social credibility of the Group declines, which can adversely affect the operating results of the Group due to the suspension of transactions with customers or a large amount of administrative monetary penalty, a claim for damages, etc.

11. Risks related to litigation, etc.

Lawsuits may be brought against the Group with regard to its business activities, liabilities pertaining to services or products offered by the Group, labor issues, etc. Depending on the development of such lawsuits, the Group may be subject to liabilities for damages and loss of credibility. In such cases, the operating results of the Group can be adversely affected.
While the Group is reinforcing awareness efforts and the internal management system so that no service or product offered by the Group may infringe any intellectual property rights of any third party, it is possible that a third party already possesses intellectual property rights which is beyond the Group’s knowledge.
In that case, the Group can be subject to a suit or claim for the reason of infringement, forcing the Group to bear the damage or to acquire or develop alternative technology, which can adversely affect the operating results of the Group. The following event has occurred which the management recognizes can materially impact the Group’s financial position, operating results and status of cash flow.

・ Material lawsuit, etc.
A suit was filed against Cresco Wireless, Inc., a consolidated subsidiary of the Company, in the fiscal year under review.
* For details, refer to the Annual Securities Report, “V. Financial Information, 1. Consolidated Financial Statements, (2) Others.”

12. Risks related to financial markets

The valuation of the securities and other financial instruments held by the Group is dependent on trends in the domestic and overseas economies as well as stock markets and other financial markets. As such, we regard this as an important risk concerning fund management and other business investments.
While the Group works to minimize risk by grasping fair values of securities, etc. in appropriate timing, it is difficult to avoid risk completely; if an unavoidable market crash occurs, a significant decline in asset value may occur and can impact the operating results, etc. of the Group.
If the price of financial instruments held by the Group should fall, the Group may incur a significant loss.
In addition, a future revision in systems, standards, etc., concerning the accounting treatment of fair value of financial instruments can adversely affect the operating results of the Group.

13. Risks related to natural disasters, etc.

The Group is endeavoring to take actions for a BCP tailored to the mode of business and actual situations of the Group and introduce a teleworking system in order to fulfill its security obligation owed to stakeholders and respond promptly to emergencies on the assumption of the materialization of external threats, including natural disasters such as earthquakes, storms or floods, accidents such as fires, the closure of business establishments due to a large-scale system failure or other incidents, physical or cyber terrorism, etc.
However, a disruption to business continuity or decline in productivity may occur due to considerations for securing offices and places of business, securing workforce and ensuring safety and hygiene, etc., which can adversely affect the operating results of the Group.
Besides the damage, destruction and/or disruption of social infrastructure and a failure of central functions, if significant damage occurs to customers, suppliers or supply chains, order reception and supply may stagnate for a long period of time in the course of reconstruction and recovery, which can adversely affect the operating results of the Group.

14. Risks related to infectious diseases

Assuming the manifestation of threats including a pandemic, cluster occurrence, overshoot and lockdown due to the spread of infectious disease, the Group enacted the Basic Policy for the Action Plan Against Novel Influenza and Basic Measure Against COVID-19 in order to respond promptly to emergencies, thereby fulfilling its security obligation of avoiding the exposure of stakeholders to infection risk and also endeavors to take actions for a BCP tailored to the operation of business and actual situations of the Group and to introduce and build a teleworking system.
However, a disruption to business continuity or decline in productivity may occur due to the nature of the business, the closure of offices and places of business, a request for working from home and teleworking, the restriction of movement, the avoidance of three Cs (closed spaces, crowded spaces, and close-contact settings), the prohibition of nonessential and non-urgent outings, etc., which can adversely affect the operating results of the Group. If damage occurs to customers, suppliers or supply chains, the receipt of sales orders and supply may stagnate for a long period of time throughout the course of infections abating, resulting in imposing an adverse impact on the operating results of the Group.

15. Risks related to investment including M&A and capital and business alliance

The Group promotes active M&A and capital and business alliances for the purpose of expanding the scale and areas of business and reinforcing the profit bases in the software development business, which is the main line of business, advanced technology (AI, cloud computing, etc.) related business and new business areas.
Investment is executed upon conducting detailed due diligence under cooperation with external experts and, at the same time, sufficiently examining investment effect, risk, etc. in advance at the Board of Directors, etc. Profit initially expected, however, may not be obtained due to changes in the business environment and other factors, resulting in a decreased possibility of recovering investment.
If the possibility of recovering investment decreases, business reorganization or similar measures may be implemented in order to streamline management and strengthen the business base, in which case costs entailed by reorganization can be incurred temporarily, adversely affecting the operating results of the Group.
Sometimes, business reorganization or similar measures cannot be implemented in an appropriate period and method, in which case the whole or a part of investment can become a loss or additional investment can be required, etc., adversely affecting the operating results of the Group.
"In addition, if goodwill fails to generate sufficient future cash flow, it will be necessary to recognize impairment loss, which may cause a large amount of impairment loss to adversely affect the operating results of the Group."